Dividend Coverage Ratio Template

This Dividend Coverage Ratio template download shows you how to calculate a company’s dividend cover.

What is Dividend Coverage Ratio?

The Dividend Coverage Ratio (DCR) indicates a company’s ability to pay dividends from its profits. It reflects how many times a company can cover dividends with its earnings, helping investors evaluate dividend sustainability.

A higher dividend coverage ratio suggests more financial stability as the company will have profits comfortably in excess of the amount earmarked for dividend payouts. If the ratio is greater than 1, we can assume that the company is generating enough profit to pay the dividend. However, most investors prefer a larger ratio than this to feel comfortable that the dividend payments are secure.

Dividends are typically paid out by mature companies operating with relatively consistent profits and solid cash flow generation. Monitoring the dividend coverage ratio is a good way to ensure that the company continue to produce sufficient profits to keep paying its dividends. If the ratio is deteriorating it may be an indication that the company is beginning to underperform or that the dividend is growing at a rate ahead of profits. If the dividend coverage ratio is increasing, then there may be a case for investors to call for a larger dividend payout, or that the company will need to find an additional use for the excess profits generated.

Dividend Coverage Ratio Formula

Dividend coverage ratio is calculated as Net profit (or Profit after tax) once any preference share dividends have been subtracted, divided by the total dividends declared to shareholders. The formula is shown below:

Download the Free Template

Download the free Dividend Coverage Ratio template in the free resources section.

Steps for Using the Template

1. Download the Financial Edge excel template.
2. Input your own numbers in place of the example figures in the blue font cells.
3. Add or remove line items as needed by selecting a row, right-clicking, and choosing “Insert” or “Delete”.
4. Ensure the formulas in the black font cells account for any changes.
5. You now have your customized Dividend Coverage Ratio template!

Benefits of the Dividend Coverage Ratio

This ratio is a useful metric when looking at a company which pays out dividends to shareholders

• The ratio is a quick and efficient way to ensure that a dividend-paying company can meet its dividend obligations.
• It can be used to model scenarios if assumptions are made for both dividend and net profit growth.
• If investors see market conditions are deteriorating, the ratio can be used to monitor a company’s ability to meet its dividend payments.
• If the ratio is expanding it can suggest that the company is generating profits comfortably in excess of its dividend payments so it may initiate a share buyback or alternative means of returning cash to shareholders.

Limitations of the Dividend Coverage Ratio

There are several limitations with the ratio:

• It only applies to companies paying dividends so will not typically be applicable to growth companies.
• It uses net income for the ratio calculation rather than actual cash flow generation which will be needed to facilitate the dividend payment.
• Net income is not an indication of future net income generation particularly in uncertain market conditions – using a company’s historical dividend coverage ratio may not be an indication of future ability to meet dividend payments.

Free Finance Templates

For more resources, check out Financial Edge’s business templates library to download numerous free Excel modeling and Word document templates.

Investment Banking Certification

Acquire the hands-on expertise necessary to support the primary goals of investment banking: raising capital and executing mergers and acquisitions. Whether you are an intern aiming to impress interviewers, an analyst fast-tracking your career, or an associate strengthening your foundational knowledge, this course is structured to cultivate practical skills on your own schedule. It encompasses accounting, financial modeling, valuation (comprising trading comparables, discounted cash flow and weighted average cost of capital, or WACC), as well as M&A (mergers and acquisitions) and LBO (leveraged buyout) analysis.